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Why Kohl's Stock Lost 11% Last Month

Shares of the retailer fell as investors reacted to its third-quarter earnings report and worries about the sector returned.

What happened

Shares of Kohl's (NYSE:KSS) were slipping last month after the department store chain issued underwhelming guidance in its third-quarter earnings report. According to data from S&P Global Market Intelligence, the stock finished November down 11%, sliding alongside its department store peers as investors seemed disappointed with the latest round of retail reports.

As you can see from the chart below, the stock started falling in the second week of November on reports from rivals like Macy's and Nordstrom, and then plunged again when Kohl's report came out on Nov. 20.

So what

Investors seem uncertain if the resurgence in retailers like Kohl's is going to last. Though department stores including Macy's and Nordstrom reported comparable sales growth and retailers generally turned in strong numbers, investors nonetheless sold Kohl's heading into its earnings report.

Image source: Kohl's.

Its actual third-quarter numbers were solid as comparable sales increased 2.5%, its fifth consecutive quarter of comparable sales growth, which pushed overall revenue up 1.3% to $4.37 billion, edging out estimates at $4.36 billion. The company closed a handful of stores over the last year, accounting for the difference in comparable sales and revenue growth. Operating income was flat in the quarter, but earnings per share surged from $0.70 to $0.98 due to lower interest expense and a lower tax rate from the tax reform law. That beat estimates at $0.96.

CEO Michelle Gass said, "We experienced strength across our entire apparel business, and our focus on speed to market and inventory management are driving relevancy with our customers, resulting in sales growth, margin expansion, and clean inventory levels. We are executing extremely well in our stores and our digital channels, and our efforts across the company have us well-positioned going into the fourth quarter."

Now what

Kohl's actually raised its guidance for the full year, calling for adjusted earnings per share of $5.35 to $5.55, up from a prior range of $5.15 to $5.35. However, that was short of the analyst consensus of $5.51.

Kohl's shares have continued to fall in the first few sessions in December alongside the broader market sell-off. The stock looks cheap at a P/E of 12 based on this year's expected earnings, but skepticism is likely to remain as long as the market volatility persists. Shares could move sharply when its holiday sales report comes out in another month.

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